Prices versus Quantities across Jurisdictions. Martin Weitzman, August 9, 2019, Paper, “We extend the standard “prices versus quantities” framework for pollution control to cover multiple heterogeneous jurisdictions interacting strategically with each other. When multi-jurisdictional externalities are present and the uncertainties among jurisdictions are independent, the regulatory game exhibits a unique subgame perfect equilibrium. For any one jurisdiction, the equilibrium choice of instrument is given by the sign of the original prices versus quantities formula. Thus, it is an optimal strategy for a jurisdiction to choose a price instrument when the slope of its own marginal benefit is less than the slope of its own marginal cost and a quantity instrument when this condition is reversed. The result suggests that the original nonstrategic criterion for the comparative advantage of prices over quantities may have wider applicability to determining instrument choice in a noncooperative strategic environment.Link

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Market Reaction to Mandatory Nonfinancial Disclosure. George Serafeim, August 8, 2019, Paper, “We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an average negative market reaction of –0.79% across all firms, (ii) a less negative market reaction for firms having higher predirective nonfinancial performance, and (iii) a less negative reaction for firms having higher predirective nonfinancial disclosure levels. In addition, results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Finally, we find that the negative market reaction is concentrated in firms with weak preregulation ESG performance and disclosure, which exhibit an average return of –1.54%; in contrast, firms with strong preregulation disclosure and performance exhibit an average positive return of 0.52%. Overall, the results are consistent with the equity market perceiving net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure around key events surrounding the mandatory disclosure regulation of nonfinancial information.Link

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Pol Antràs on Trade, Taxation, Solutions for Income Inequality, and the Future of Globalization August 2019. GrowthPolicy’s Devjani Roy interviewed Pol Antràs, Robert G. Ory Professor of Economics at Harvard University, on trade, taxation, solutions for income inequality, and the future of globalization. | Click here for more interviews like this one. Links: Pol Antràs’s faculty page […]

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Corporate Purpose and Firm Ownership. George Serafeim, August 2019, Paper, “Analyzing data from approximately two million employees in a sample of more than 1,000 established public and private US companies, we find that corporate purpose is lower among employees of public companies. This result is driven by weaker beliefs held by employees in the salaried middle ranks and hourly workers, and not by senior executives. Among public companies, purpose is progressively lower in companies with more concentrated shareholders, suggesting that shareholder power is associated with a lower sense of purpose among employees. A substantial portion of these patterns can be explained by differences in CEO backgrounds and CEO-employee pay gap. Public firms, particularly those with strong shareholders, choose outsider CEOs at a higher rate and pay them more relative to their employees. Altogether, this study finds that the strength of corporate purpose varies substantially across companies, and is related to the identity of the firm owners, and the choices they make.Link

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Varieties of Outward Chinese Capital: Domestic Politics Status and Globalization of Chinese Firms. Meg Rithmire, , Paper, “A great deal of scholarly and popular attention has been devoted the “specter of global China” (Lee 2017). Contemporary China has been interacting with and shaping processes of globalization since it opened its door in 1978, but the more recent spate of attention has focused specifically on Chinese outward investment, which has soared since the early 2000s and especially since the global financial crisis in 2008. Scholars and journalists have sought to understand the extent to which China is “buying the world,” what it means for both the developing world (presumed to be the target) and developed world (presumed to be the competition), and what patterns of investment can illuminate about whether China is “playing our game” (harmonizing with western political and economic institutions) or pursuing a revised world order (Nolan 2013; Steinfeld 2010; Toh 2017).Link

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What About Rochester? Kenneth Rogoff, August 1, 2019, Opinion, “There is much to be celebrated in the rise of modern megacities, especially in developing countries. But if the trend persists in advanced economies, which is by no means certain, greater public and private innovation will be required to strike a better regional growth balance.Link

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Costs, Benefits and Regulation Post-Trump. Cass Sunstein, August 1, 2019, Opinion, ““I told you so.” That is what some progressives are saying about bipartisan policies that Democratic presidents carried over from their Republican predecessors and that the Trump administration is sometimes putting in a less-than-wonderful light.Link

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Tax Administration vs. Tax Rates: Evidence from Corporate Taxation in Indonesia. Rema Hanna, August 2019, Paper, “Developing countries collect a far lower share of GDP in taxes than richer countries. This paper asks whether changes in tax administration and tax rates can nevertheless raise substantial additional revenue – and if so, which approach is most effective. We study corporate taxation in Indonesia, where the government implemented two reforms that differentially affected firms. First, we show that increasing tax administration intensity by moving the top firms in each region into “Medium-Sized Taxpayer Offices,” with much higher staff-to-taxpayer ratios, more than doubled tax revenue from affected firms over six years, with increasing impacts over time. Second, using non-linear changes to the corporate income tax schedule, we estimate an elasticity of taxable income of 0.59, which implies that the revenue-maximizing rate is almost double the current rate. The increased revenue from improvements in tax administration is equivalent to raising the marginal corporate tax rate on affected firms by about 23 percentage points. We suggest one reason improved tax administration was so effective was that it flattened the relationship between firm size and enforcement, removing the additional “enforcement tax” on large firms. On net, our results suggest that improving tax administration can have significant returns for developing country governments.Link

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Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates. Feng Zhu, July 2019, Paper, “We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging market economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the predictions from the trilemma: Both exchange rate flexibility and capital controls reduce the sensitivity of local to base-country policy rates.Link

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How Not to Think About Job Creation. Ricardo Hausmann, July 31, 2019, Opinion, “Governments are right to focus on creating more good jobs, because work is the source of most people’s livelihood in every society. But in the majority of cases, the solution lies in policy areas that are not amenable to tools wielded by ministers of labor or education.Link

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